Bankruptcy is a legal process that lets individuals or businesses start over financially when they can't afford to pay the debts. There are various types of bankruptcy, commonly referred to by their chapter within the U.S. Bankruptcy Code. Depending on which type you file, the bankruptcy court decides how creditors will be paid; it can also collect and sell your assets and belongings or create a repayment plan.
The major types of bankruptcy filings
All bankruptcy cases in the United States are handled through a federal court, and bankruptcy filings in the United States fall under one of several chapters of the Bankruptcy Code. Here are the major types of bankruptcy filings you should know:
- Chapter 7: Individuals and in some cases businesses, with few or no assets typically filing for Chapter 7 bankruptcy. It allows them to dispose of their unsecured debts, such as credit card balances and medical bills.
- Chapter 11: Businesses often file for Chapter 11 bankruptcy, the goal of which is to reorganize, remain in business, and once again become profitable. Filing Chapter 11 bankruptcy allows a company to create plans for profitability, cut costs, and find new ways to increase revenue.
- Chapter 13: An individual debtor filing under Chapter 13 doesn’t have to liquidate assets. It permits a debtor with a regular income to repay at least a portion of the debt over three to five years. Debtors who have enough income to pay all or part of their debts must use Chapter 13 instead of Chapter 7.
What happens when public Companies go bankrupt in the US?
In most instances, companies that file under Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. However, even when a company is delisted from one of these major stock exchanges, its shares may continue to trade on either the OTCBB or the Pink Sheets. However, investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss.
Some companies are so far in debt or have other problems so serious that they can't continue their business operations. They are likely to "liquidate" and file under Chapter 7. Their assets are sold for cash by a court-appointed trustee. Bondholders, and other unsecured creditors, will be notified of Chapter 7 and should file a claim in case there's money left for them to receive a payment. However, stockholders do not have to be notified of the Chapter 7 case because they generally don't receive anything in return for their investment. Meanwhile, the stock of a Chapter 7 company is usually worthless and investors have lost the money they invested. But in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims. (Source from: www.sec.gov)